Ten of the world's biggest banks have established a $70bn (£38.74bn) emergency bail-out fund intended to avert further failures following a dramatic weekend in which Lehman Brothers filed for bankruptcy and Merrill Lynch succumbed to a takeover.

As top financial regulators burned the midnight oil on Sunday night to get a grip on a rapidly widening banking crisis, the US treasury secretary Henry Paulson issued a statement acknowledging an "extraordinary environment" in the financial markets. The Federal Reserve weakened its guidelines to make it easier for troubled institutions to access urgent funds.

Ten international banks including Barclays, Credit Suisse, Citibank, Deutsche Bank, Bank of America and Goldman Sachs announced that they were each contributing $7bn to a hastily arranged fund. If any of them find themselves in danger of collapse, they will be able to access the pool of money with any single troubled bank able to draw up to a third of the $70bn total.

The banks said they were acting together to "enhance liquidity and mitigate the unprecedented volatility and other challenges affecting global equity and debt markets".

Lehman Brothers filed an official declaration of bankruptcy this morning, effectively drawing down a curtain on its 158-year-old history. The bank has 25,000 staff and its directors include the GlaxoSmithKline chairman Sir Christopher Gent. It follows Bear Stearns into oblivion as a victim of the credit crunch.

Apparently afraid of a similar fate, Merrill Lynch last night agreed in principle to a $44bn buyout by Bank of America, worth $29 a share. Barring last-minute hitches, Merrill's chief executive, John Thain, is expected to brief investors on the deal alongside Bank of America's boss Ken Lewis this morning.

As darkness fell in New York last night, shell-shocked employees trickled out of impromptu Sunday sessions at their desks at leading banks. Outside Lehman Brothers' headquarters in midtown Manhattan, some carried boxes full of belongings as they cleared their desks in anticipation of the firm's closure.

Jeremiah Stafford, a Lehman employee who works in the bank's credit derivatives department, told CNBC television that people were anticipating redundancy.

"Nothing's official yet but people are preparing for the worst," said Stafford. "Lehman Brothers is a great place to work and people there should walk out proud, knowing that they contributed."

Another employee, who declined to give his name, struggled to retain his composure as he described the situation as a "tragedy", saying: "I never thought it would come to this."

The insurer AIG will be the next institution under the microscope. It is reportedly seeking to raise $40bn to prevent a downgrade in its credit rating which could severely affect confidence in the cover it provides to clients.

As efforts continued to stem plummeting confidence in the banking system, the Federal Reserve announced that it was weakening its standards for collateral needed by banks wishing to borrow emergency funds. It will accept any investment-grade credit securities rather than demanding highly rated AAA securities or asset-backed notes.

"We have been in ongoing discussions with market participants, including through the weekend, to identify potential market vulnerabilities in the wake of an unwinding of a major financial institution," said the Fed's chairman, Ben Bernanke.

As top banks struggle to unwind credit swap deals involving Lehman Brothers, the Securities and Exchange Commission announced that it was taking steps to ensure that cash and investments owned by the bank's customers are ring-fenced and protected.

The SEC has had a team of staff in Lehman's office. The regulator said it was working with its counterparts around the world including the Financial Services Authority in London.

The SEC's chairman, Christopher Cox, said: "We are committed to using our regulatory and supervisory authorities to reduce the potential for dislocations from recent events and to maintain the smooth functioning of the financial markets."

Stocks on both sides of the Atlantic are expected to open sharply lower this morning as investors struggle to digest the rapidly moving events. The Australian stockmarket, one of the few open as events unfolded last night, dropped by nearly 2% at one stage.

The US government has refused to provide funds to prop up Lehman. Some reports suggested that, anxious to avoid a further meltdown, it put pressure on Merrill to agree a sale to Bank of America.

The US treasury secretary said the Fed and the SEC were working to facilitate "liquid, smooth-functioning markets" and to address credit concerns.

"I particularly appreciate the efforts of market participants who came together this weekend and initiated a set of steps to facilitate orderliness and stability in our financial markets as we work through this extraordinary environment," said Paulson.